Policy Proprioception

"Proprioception" is a word that Macro Man has only ever heard inside of a gym, usually in the context of balancing on some sort of ball or hemisphere. It refers to the body's sense of itself, and how different areas of the body relate to each other. You can get a sense of your own proprioception by balancing on something with your eyes closed, which is surprisingly difficult in relationship with doing so with eyes wide open.

The economic policy proprioception in Europe appears to need a bit of training. Saturdays and Sundays are now workdays, unfortunately, and Macro Man's Blackberry rattled and hummed all weekend with new headlines out of Europe.

* The Hypo Real estate bailout falls through....and then is reincarnated in a larger (but apparently still insufficient) size.

* Germany complains about the Irish deposit guarantee...and then offers a similar guarantee for German banks

* Fortis is dismembered, while the market watches Dexia with bated breath

* A Europe-wide rescue package is proposed, rejected, and then apparently revived last night

The US authorities may be spending like a drunken sailor, but on current evidence the Europeans would struggle to organize a piss-up in a brewery. And although European equities have come under the cosh today, they are still well off their recent lows, unlike stocks in the US, Japan, and a number of emerging markets. At the time of writing, the IBEX is down less than a percent this month, while the Eurostoxx is only down a third of the amount implied by S&P 500 futures. Colour Macro Man bemused on this one...

The market's vote of no confidence in Europe has been more acutely observed in the currency market, where recent EUR/USD resembles nothing so much as a band of lemmings jumping off a cliff. Was it really only two weeks ago that EUR/USD had its biggest daily gain in the nearly ten-year history of the single currency?
So global equities are a sea of red, but as of yet today's weakness is relatively controlled; there's no sense of panic. Macro Man cannot help but think that risks of a global, coordinated rate cut have risen substantially, particularly after the ECB left the door open for an intra-meeting cut last week. It is perhaps this possibility that has kept today's European sell-off relatively orderly. As suggested last week, the front end of Europe has firmed, with the Schatz future trading up nearly half a point from Friday's settlement price.

Macro Man is trying to structure a portfolio wherein he participates in equity weakness but has some protection in the event of a coordinated policy easing- which would presumably lead to at least a short term bounce in equity indices. Such a bounce may be short-lived (as the recent price action around the TARP would suggest), but still might be painful. Macro Man was interested to see that the SEC has decided to end its short selling ban on financials this this week.

Perhaps he is too cyniccal, but are they now trying to let the market get short so that a subsequent squeeze will drive prices higher than if there were no shorts out there? Hmmmmm....

Macro Man is trying to maintain a sense of portfolio proprioception, but in an ever-changing world of correlation breakdowns, volatility spikes, and regulatory regime shifts, it's all too easy to lose his sense of balance with an embarrassing thud.
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jdc
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October 6, 2008 at 10:17 AM ×

Genuine question - how many people hedge their international equity investments.

Because if the answer is not 'the vast majority', then I guess in a situation of zero decoupling and similar fundamentals, you would expect a 10% fall in the S&P and a 5% fall in Euro/Dollar to lead to only a 5% fall in the Dax, maybe?

I guess it depends to an extent how much of each index's member companies' earnings are domestic, too.

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jdc
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October 6, 2008 at 10:18 AM ×

"for currency risk", was the missing end of that first sentence.

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Macro Man
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October 6, 2008 at 10:19 AM ×

jdc, a lot of institutional equity portfolios are currency hedged, either via passive indexing or through currency overlay managers.

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Sean Maher
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October 6, 2008 at 10:33 AM ×

As posted on my blog today, I'm running my long term short positions in commodities and equities, but I'm tightening my trailling stops as agree re risk of imminent rate cuts; the Fannie & Freddie CDS auctions today will be the key event this week, and may send a few more insolvency dominoes tumbling. Gold is becalmed so far, but suspect it will have another run...

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October 6, 2008 at 11:39 AM ×

Interesting the IBEX, range bound (despite the high volatility) for the month. Being 35% banks and maybe 5% industrials, this can be taken for what it might be worth in terms of understanding where the focus is. The fact that the residential property crash, on a national level, has so far failed to materialize might also be helping.

I have no real faith in it continuing as such, but five of the six banks on the index are positive for the month.

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Anonymous
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October 6, 2008 at 1:07 PM ×

"Perhaps he is too cyniccal, but are they now trying to let the market get short so that a subsequent squeeze will drive prices higher than if there were no shorts out there? Hmmmmm...."

MM I think they have pulled that little stunt once to often myself.

Also:
Treasury Secretary Henry Paulson is expected to name Neel Kashkari to oversee the $700 billion program to buy distressed assets from financial institutions, The Wall Street Journal reported on Sunday.

Kashkari, a Treasury assistant secretary for international affairs and a former Goldman Sachs banker
http://www.reuters.com/article/ousiv/idUSTRE4950BS20081006

Ah the stench of it all

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Anonymous
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October 6, 2008 at 6:16 PM ×

what a day.
Equity mkt was thinking (together with me) that they were to do a coordinated cut. No matter if useful or not. Mkt wants it. This weighed more than the disappointing Paris meeting outcome (will take all the necessary measures... really?!?)in my view .
Another carnage tomorrow will raise chances they act. Vix in uncharted territory.... think that a bear mkt rally is very near,even if today seemsthe end of the world.

sick trader

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